I know this has been discussed before but I just want clarification on it.
Example:
I own a $250,000 rental that is fully paid for and owned for over 10 years. I am thinking about selling in the near future and want to limit the capital gain taxes I have to pay.
Can I refiance it to say $200,000 (80%) and that would be tax free???
Then a year later I sell it for $250,000 and pay off the $200,000 loan. I would then only have to pay capital gains on the $50,000???
Allright, someone correct me if I’m wrong here…but the capital gains will be based on your cost basis corrected for depreciation vice your loan amount. When you bought the building, you established your cost basis with your purchase price and closing costs. Along the way, any capital improvements would increase your basis. Then you have to factor in the annual depreciation which would lower your basis. So your capital gains should be figured on this corrected depreciation…otherwise people would refi an amount close to their asking price prior to selling to avoid paying capital gains.
Loan values have nothing to do with capital gains. You can defer the tax by using a 1031 exchange. You can avoid the tax by donating the property to a charity.
amkkba,
As BLL stated, you can defer them by doing a 1031 property exchange (there are time limits where you have to determine prospective exchange properties and then another time limit for when you actually have to close the deal). You would roll your capital gains into that next deal and them pay them when you sold that property (unless you decided to do another 1031). So if you had a year when your income was lower than usual, you could sell then and maybe be in a lower tax bracket.
The other way I can think of would be if you sold the property on owner financing. You’d only be claiming your gains a little at a time each year when you receive the payments from the buyer.
As far as that refinancing plan stated earlier in this thread…sounds like you either didn’t understand how those people were doing their deals or they were doing something illegal. If refinancing worked that way and you could claim smaller capital gains based on loan values, wouldn’t everyone refinance as much as possible before selling? Then we’d have people claiming a loss if they sold for less than their very high refinanced amount.
amkkba,
I have seen other postings stating that people do this (at least that is what it appeared to me that they did).
Those other postings were wishful thinking. If those posting are in this forum then you should have also seen responses pointing out the error in their thinking.
So this is not a viable way to save on capital gain taxes then??
Definitely not. As others have already told you, the amount of taxable capital gain has nothing to do with the size of your mortgage loan.
Is there anyway to save on capital gains tax?
Several.
Don’t sell.
Sell to an unrelated party at a loss, or for zero profit.
Use a 1031 exchange to trade up.
Donate your property to a qualified charity.
Move into the property and occupy it for two years as your primary residence. When you sell, up to $250K of your “profit” will be tax free (per taxpayer), although unrecaptured depreciation will still be taxed.
Die. Your heirs will inherit at a stepped up basis and have no taxable capital gains if they sell right away.
Inherit from someone else. This one works for anyone near death. If your spouse is on his/her deathbed, transfer title to your spouse. At death, inherit at stepped up basis. If you know someone on death row that is about to be executed, have him/her execute a will naming you as heir to any real estate they may own. Transfer title to death row inmate just before execution and inherit at stepped up basis. How about a terminally ill patient with no family in hospice care?
Just a few off the top of my head. Pick one that works for you.
I should have said this earlier. Capital gains can be avoid permanently using a 1031 exchange. Do the exchange into a TIC and hold it until you die. Your heirs inherit at the market value of your death.